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Wendy's (WEN) Up 4.9% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Wendy's (WEN - Free Report) . Shares have added about 4.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Wendy's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Wendy's Earnings Beat, Revenues Miss Estimates in Q3

Wendy’s reported mixed results for the third quarter of 2018, wherein revenues missed estimates while earnings exceeded the same.

Adjusted earnings of 17 cents surpassed the Zacks Consensus Estimate of 15 cents by 13.3%. The bottom line also increased a whopping 88.9% year over year, primarily favored by the positive effect of lower tax rate from Tax Cuts and Jobs Act of 2017. Increase in adjusted EBITDA also boosted the reported quarter’s earnings.

Quarterly revenues of $400.6 million lagged the consensus mark of $406.4 million by 1.4%. However, the top line improved 30% from the year-ago quarter, driven by increased sales at the company-operated restaurants. Sales were favored by an increase in the number of operating restaurants and positive comps.

Revenues also gained from an increase in franchise royalty revenues and fees, which were primarily driven by new restaurant development and lower franchise incentives.

Meanwhile, comps at the North America system restaurants were down 0.2% compared with an increase of 1.9% in the second quarter and 2% in the year-ago quarter.

System-Wide Sales Discussion

Global system-wide sales, including both company-operated and franchise restaurants, were $2.7 million in the reported quarter, up 1.7% from the prior-year quarter. The North America system-wide sales were $2.5 million in the third quarter, reflecting 1.2% year-over-year increase. Systemwide sales at the International segment amounted to $0.13 million in the quarter under review, up 13.2% year over year.

Operating Highlights

Company-operated restaurant margin was 15.7% in the reported quarter compared with 15.9% in the year-ago quarter. The 20-basis points (bps) decline was primarily caused by higher insurance and labor costs, partially offset by pricing actions and lower commodity costs.

General and administrative expenses in the third quarter were $46.5 million, down 10.1% from $51.7 million recorded in the prior-year quarter. The decline reflected a decline in incentive compensation accrual, and lower employee compensation and related expenses that stemmed from the company’s G&A savings efforts.

Third-quarter operating profit amounted to $77.3 million, marking 24.1% increase from the year-ago quarter’s figure of $62.3 million. Net income of $391.2 million increased from $13.7 million recorded in the year-ago quarter.

Adjusted EBITDA increased 9.8% from the prior-year quarter, primarily from revenue growth, and lower general and administrative expenses. Adjusted EBITDA margin also expanded 200 bps to 33.6%.

Balance Sheet

Cash and cash equivalents as of Sep 30, 2018, was $634.8 million compared with nearly $171.4 million as of Dec 31, 2017. Inventories at the end of the third quarter amounted to $3.3 million, up from $3.2 million at the end of 2017.

Long-term debt totaled $2.31 billion as of Sep 30, 2018, compared with $2.26 billion as of Dec 31, 2017.

Wendy’s approved an increase of $120 million to its share repurchase authorization of $100 million from August 2018 at the same time when it announced the sale of its stake in Inspire Brands.  This authorization currently totals $220 million and expires on Dec 27, 2019.

Through Oct 30, 2018, management repurchased 8.5 million shares for $146.2 million at an average price of $17.21 per share. The company now has roughly $249 million remaining on its share repurchase authorizations.

Other Developments

In the third quarter, Wendy’s had 37 global restaurant openings, with an increase of 13 net new units.

Image Activation remains an integral part of the company’s global growth strategy, and includes reimaging of existing restaurants and building new ones. At the end of the third quarter, 48% of the global system was image activated. In the quarter under review, Wendy’s facilitated nine Franchise Flips.

In the third quarter, the company acquired 16 restaurants in the Columbus, OH, for roughly $21.4 million as part of its ongoing system optimization strategy. It continues to anticipate company-operated restaurant ownership of roughly 5% of the total system.

2018 Outlook

For 2018, the company expects North America comps growth of 1% (down from 2-2.5% growth projected earlier), with commodity and labor inflation of 1-2% and 3-4%, respectively. Company-operated restaurant margin is expected to be 16%-16.5% (down from 17-18% stated earlier). It anticipates adjusted EBITDA margin of approximately 33%.

Adjusted EPS is anticipated to be 56-58 cents, slightly higher from 55-57 cents guided earlier.

For 2018, Wendy’s expects 2018 global net new unit growth of 1.5%, comprised of roughly 1% growth in North America and 10% growth in International.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Wendy's has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Wendy's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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